Home » Halliburton Company Q3 2013 Earnings Conference Call Transcript

Halliburton Company Q3 2013 Earnings Conference Call Transcript

Halliburton Company (NYSE: HAL)

Q3 2013 Earnings Conference Call

Event Held on October 21, 2013 9:00 a.m. Eastern Time

Section I: Management Presentation

 

Operator

Good day, ladies and gentlemen, and welcome to the Halliburton third quarter 2013 earnings conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this call is being recorded.

I would now like to introduce your host for today’s conference, Mr. Kelly Youngblood. Sir, you may begin.

Kelly Youngblood – IR, Halliburton Company

Thanks, Sam. Good morning and welcome to the Halliburton’s third quarter 2013 conference call. Today’s call is being webcast and a replay will be available on Halliburton’s website for seven days. The press release announcing the third quarter results is also available on the Halliburton website.

Joining me today are Dave Lesar, CEO, Jeff Miller, COO, and Mark McCollum, CFO. Tim Probert, President of Strategy and Corporate Development will also be available today for follow-up calls.

I would like to remind our audience that some of today’s comments may include forward-looking statements, reflecting Halliburton’s views about future events and their potential impact on performance. These matters involve risk and uncertainties that could impact operations and financial results and cause our actual results to materially differ from our forward-looking statements. These risks are discussed in Halliburton’s Form 10-K for the year ended December 31, 2012, Form 10-Q for the quarter-ended June 31, 2013, recent current reports on Form 8-K and other Securities and Exchange Commission laws.

Our comments include non-GAAP financial measures. Reconciliations to the most directly comparable GAAP financial measures are included in our third quarter press release which, as I have mentioned, can be found on our website. In our discussion today, we will be excluding the financial impact of the third quarter charges related to employee severance and asset write-offs of $38 million after-tax, or $0.04 per diluted share, unless otherwise noted. We will welcome questions after we complete our prepared remarks. We ask that you please limit yourself to one question and one related follow-up to allow more time for others who have questions.

Now, I’ll turn the call over to Dave.

David J. Lesar – Chairman, President, and CEO, Halliburton Company

Thank you, Kelly, and good morning to everyone. Before I talk about another strong quarterly performance, I would like to review the actions we’ve taken this year around our commitment to delivering shareholder returns to you. This year, we’ve repurchased approximately 4.4 billion, or 10% of outstanding shares. Earlier this year, we announced a 39% increase in our dividend. These actions reflect our continued confidence in the strength of our business outlook. Going forward, we remain fully committed to increase shareholder returns. We are targeting a dividend payout of at least 15% to 20% of net income, supplemented by additional systematic share buybacks, while leaving room for any capital spending or acquisitions we may want to do. We have been and will continue to be relentlessly focused on delivering best-in-class returns.

Now moving to the third quarter. Overall, I am pleased with our operational results. Total company revenue of $7.5 billion was a record quarter for Halliburton, while operating income was over $1.1 billion. We achieved record revenues this quarter in our Boots & Coots, Cementing, Completion Tools, Drill Bits, Multi-Chem and Testing product lines. From an operating income perspective, our Baroid, Completion Tools, Drill Bits and Testing product lines also set new records.

Turning to the geographies. On a year-to-date basis, our Eastern Hemisphere growth continues to lead our peer group. Compared to last year, third quarter year-over-year revenue and operating income grew 17% and 30%, respectively. Sequentially, the revenue improvement, a 9% growth in operating income, was driven by our Europe/Africa/ CIS region. In addition to record revenue in that region, we saw a strong sequential improvement in margins of 300 basis points, due to improved performance in our Russia, North Sea and Angola operations. Consistent with previous years, we expect the fourth quarter in the Eastern Hemisphere to be our strongest quarter of the year, due to seasonal year-end software and equipment sales.

Moving to Latin America. This has been a tough year as customer activity did not meet our expectations, and Jeff will talk more about our fourth quarter outlook. But as we look ahead to Latin America over the next few years, there are several positive factors coming into play. First, Mexico activities are expected to pick up significantly, as the mega tender projects ramp up in the first part of 2014. And although we do not expect a material impact next year, the recent reform discussions signal a strong opportunity in Mexico shale and deepwater markets.

In Brazil, we have a leading market share today in a number of long-term deepwater contracts, including some that could extend past 2020. Although activity levels are just treading water today, as deepwater activity level accelerates, we see significant upside in Brazil. However, there could be some short-term bumps in the road, but in the long-term, Latin America is expected to be an outstanding growth market for Halliburton.

In North America, we are expecting the typical seasonal decline in the fourth quarter that we have experienced in previous years. However there are some additional transitory issues we are currently facing. Due to the recent floods in Colorado, logistical disruptions in the Niobrara where we have a very high market share, are lingering into the fourth quarter, which is continuing to impact our efficiency and cost structure in that basin. These cost inefficiencies should be fixed by the end of the year.

And pricing — the North America market continues to have excess supply of pressure pumping equipment, and although this is improving, we anticipate pricing pressure will continue as contracts review during the next quarter or so. Accordingly, we are already working on adjusting our cost structure. Despite these transitory issues, we believe that we will see margin improvement as we go through 2014 for a number of reasons.

First, the efficiency trend on land plays right to our strengths. We are not only leading the industry in execution in surface efficiency, but we are now introducing new technologies, which are changing the ways that customers approach their subsurface. And you will hear more about these at our analyst day in a couple of weeks. In the Gulf of Mexico, activity levels are improving. Current rigs are shifting from drilling to completions where we have a leading market position. There are dozen or so deepwater rigs scheduled on the calendar to arrive in the Gulf next year, and on those we have secured a strong drilling and evaluation position.

And thirdly, our Battle Red and Frac of the Future initiatives are being rolled out now. I have seen them start to operate in the field. The benefits are real, and we expect that they will be substantial. We have invested a significant amount of money in our Battle Red and Frac of the Future initiatives. As we told you on our last call, when we roll out these two broad corporate initiatives, we are continuously looking for ways to use them to better manage our cost structure in the organization.

During the third quarter, based on the progress of these initiatives, we’ve made adjustments to headcount and assets that resulted in a charge. As we continue with the deployment of our Battle Red initiative over the next few quarters, we expect for there to be additional headcount reductions and related severance charges. However, again as you will see at our upcoming analyst day, we are expecting a large future payoff for these initiatives.

So overall, I am very optimistic about Halliburton’s relative performance as we move into 2014, and based on early conversations with our customers, we are anticipating overall spend levels to increase. Our strategy is working well and we intend to stay the course. At our analyst day, we intend to provide you more detail about our outlook for the coming years, our ability to outperform our peer group, how we will continue to balance our geographical portfolio and describe our path toward normalized margins for both the Eastern and Western Hemisphere operations. We will continue to drive toward expanding our global portfolio in the deepwater, mature fields and unconventionals.

Now let me turn the call over to Jeff for some operational details.

Jeff Miller – EVP and COO, and Chief Health, Safety and Environment Officer, Halliburton Company

Thanks, Dave, and good morning everyone. Let me begin with an overview of our third quarter results. The Eastern Hemisphere had record revenue in the third quarter with sequential operating income growth of 9%, driven by a record quarterly revenue and improved profitability in Europe, Africa and CIS region. Relative to the second quarter, Europe/Africa/CIS grew both revenue and operating income by 3% and 29% respectively. The sequential improvement was led by improved Cementing, Boots & Coots activity in Russia, increased drilling and cementing activity in the North Sea and higher drilling and completion tool sales in Angola.

In Norway, Statoil has awarded contracts to Halliburton that provide us with a leading market share in multiple services, including drilling and completion fluids, cementing, stimulation, special tools and waste management for both onshore and offshore. The initial scope of this contract is for three years with up to six years in extensions. This award represents a significant statement of confidence from our customers for the value-added technologies that we are bringing to the Norwegian market.

In addition, we are expanding our testing portfolio in the pre-salt deepwater market in Angola. In addition to discrete testing awards for drill stem testing and our DynaLink service, Halliburton has recently been awarded contracts by multiple customers to provide a full suite of testing in subsea services in their pre-salt operations. Activity on these wins is expect to start throughout 2014 and will give Halliburton a significant position for testing in subsea services in the Angola pre-salt market. In conjunction with our successes in testing offshore discovery wells elsewhere in Africa and in Brazil, these ones demonstrate the strength of our deepwater testing and subsea business.

In the Middle East/Asia region, compared to the prior quarter, revenue and operating income were lower by 2% and 5% respectively. Higher activity in Saudi Arabia was partially offset by activity delays for stimulation activity in Australia. Also contributing to the sequential decline was the prior quarter benefit from the conclusion of the Majnoon project in a Iraq and increased completions activity in Malaysia that did not repeat.

Let me speak specifically to the Kurdistan market for a moment. This is an area that until now has been primarily focused on exploration. But we are expecting development work will ramp up over the next few years, following a series of successful appraisal programs. Halliburton has completed construction of a large multiproduct line facility in Kurdistan, and we are mobilizing for recent awards in Cementing, Sperry, Baroid, among other product lines. We are still in the early days, but we expect this to be a growth market for Halliburton.

In Saudi Arabia, Halliburton was awarded an important three-year contract to drill and complete new wells on an existing field. Saudi Arabia is a core market for Halliburton, and we believe this win demonstrates our customers’ confidence in Halliburton’s ability to help plan and mobilize to execute the significant program of work.

Turning to Latin America, we saw a significant improvement compared to the second quarter, as revenues increased 6% sequentially and operating income improved by 57%. Mexico was the primary driver where recent contract approvals resulted in an increase in the consulting and software revenue for the quarter. In the offshore market, stimulation vessel utilization was improved relative to the first half of the year. Additionally, improved profitability in wireline and cementing in Argentina contributed to the sequential growth. The improved results in Mexico and Argentina more than offset the activity-related weakness in Brazil and Venezuela.

With respect to Brazil and Mexico, we believe that the fourth quarter activity levels may be significantly lower than originally anticipated. There are two primary reasons for this decrease. First, in Mexico, activity levels on our [Southern Alliance Two] project are expected to decline meaningfully over the remaining months of the year as Pemex ramps down the ongoing IPM work in preparation for the mega tenders. We averaged seven rigs in the Southern Alliance project during the third quarter and expect to exit the year at two rigs. This lower level of activity has been expected to continue through early 2014, until the new mega tender projects are expected to ramp up.

Second, in Brazil, we’ve seen a significant reduction in drilling activity over the course of the year with a shift in focus to completions. In addition, we are currently operating under a cost structure in line with the original scope of work, which has not materialized. We are working with our customer to right size our operational footprint, but we expect reduced activity levels to extend through the fourth quarter and continue into the next year.

Ultimately, this does not change our long-term positive outlook for Latin America. The transition to the mega tenders in Mexico, in conjunction with the startup of our incentivized Humapa contract and an improved deepwater rig count, give us confidence that the activity levels in Mexico will recover as each of these areas gets underway.

And in Brazil, our recent deepwater contract have a potential term of about eight years. So although drilling activity may track sideways for several quarters, Brazil remains the largest and most active deepwater market in the world, and we believe higher drilling activity levels will resume. As a result, we expect both these countries to continue to be strong contributors to our growth and profitability over time.

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Now switching to North America. Despite the significant revenue and operating income disruption from the Colorado floods, we delivered sequential revenue growth and higher operating income. Activity levels improved across the rest of the U.S. land market with seasonal recovery in Canada and increased activity in the Gulf of Mexico deepwater market. U.S. land rig count remains sluggish and the focus from our customers continues to be on pad operations and on drilling efficiency.

As we discussed in our previous call, multi-well pads account for over half of our customers’ drilling activities in key North America basins, including the Marcellus, Eagle Ford, Bakken and Niobrara, and we see this percentage increasing. But more importantly, we see increased service efficiency on horizontal drilling, which is providing a mid-teens percentage reduction in drilling days on a year-over-year basis. And together, these two efficiency factors are contributing to well count that has modestly improved even in a flat rig environment.

We are also seeing a trend towards increasing stage counts per well, and in certain basins increased volumes pumped per stage. Already we’ve seen average stage count per well increased by 15% to 20% year-over-year in the Eagle Ford and the Marcellus. We are still in an oversupplied market today, with as much as 20% excess pressure pumping capacity. Nevertheless we believe that an increase in wells drilled per rig, combined with greater service intensity, driven by increased fluids and profit volumes per well will ultimately help balance the market. We believe that these trends play to Halliburton’s strength as the leading service provider in North America.

In the Gulf of Mexico, we saw sequential improvement, tempered by some activity delays and extended drydock maintenance on one of our large stimulation vessels. In the fourth quarter, we expect revenue improvement in the Gulf as that vessel returns to service, as well as higher completions activity and end of year sales. Looking ahead we are excited about expanding our share position in this growing market. In addition to our leading completions position, we recently deployed two new vessels focused on the shale, an intervention vessel and a fit-for-purpose stimulation vessel. Additionally, we believe we are well-positioned with drilling and evaluation services on the next round of incoming deepwater rigs.

To recap North America. Activity levels continue to improve across the U.S. land market this quarter, despite the disruption from the Colorado floods. Increased rig efficiency, combined with greater service intensity, continues to benefit us even with a rig count that is flat. We are increasingly optimistic about 2014 based on early data points and will continue to be very focused on our cost structure to enable margin growth in the coming year.

Internationally, we are very pleased with year-over-year growth. In spite of short-term activity disruptions in Latin America this year, we have led our peer group in year-to-date growth and plan to continue balancing our geographic portfolio and growing our global business going forward.

Now Mark will provide some additional financial commentary. Mark?

Mark A. McCollum – EVP and CFO, Chief Financial Officer, Halliburton Company

Thanks, Jeff, and good morning everyone. As Dave discussed, we are continuously evaluating our cost structure within the organization as we deploy our corporate initiatives. The ongoing Frac of the Future build as well as the final deployment of our Battle Red program is having a significant impact on the support and operational headcount needs of North America as well as equipment and inventory requirements. During the third quarter, as we began to roll out these initiatives, we completed an initial evaluation of these areas and took our first action, which resulted in severance and other charges during the quarter of approximately $38 million after tax. As Dave said, based on the early impact of these strategic initiatives, we believe that further rollout may result in some additional adjustments going forward.

Our corporate and other expense came in at $102 million this quarter, slightly lower than expected due to lower cost for our strategic initiatives and some lower legal expenses. Approximately $27 million of our corporate costs were for continued investment in Battle Red and other strategic initiatives. We anticipate the impact of these investments will be approximately $0.03 per share after tax in the fourth quarter, as we begin the field deployment of the last phases of the North America Battle Red initiative. In total, we anticipate that corporate expenses will be between $110 million and $120 million for the fourth quarter.

Our effective tax rate this quarter came in at 29.5%, in line with our previous guidance. For the fourth quarter, we anticipate that our tax rate will be approximately 29%. Our capital expenditure guidance of approximately $3 billion for the full year remains unchanged. Also during the quarter, we purchased 68 million shares of common stock at a price of $48.50 per share for an aggregate cost of $3.3 billion, excluding fees and expenses related to our tender offer. These shares represented approximately 7.4% of our total number of outstanding shares.

Year-to-date, we have repurchased approximately 10% of our outstanding common stock. We have approximately $1.7 billion remaining in board authorization for future share repurchases. For the fourth quarter, our average share count is expected to be approximately 855 million shares outstanding, which reflects the full benefit of our share buyback to-date. Additionally, due to our recent $3 billion debt offering, we expect interest expense to average approximately $100 million per quarter going forward.

Now moving on to our near-term outlook. For our Eastern Hemisphere business, we currently expect fourth quarter year-over-year revenue to increase by low double digits with a meaningful sequential improvement in margins into the high teens. As mentioned earlier, Latin America sequential growth in margins are expected to be significantly impacted by activity levels in Mexico. For the fourth quarter, we now anticipate Latin America revenue to be flat sequentially and do not expect a material change in margins relative to the third quarter.

Finally, for North America, we anticipate the typical weather and holiday-related seasonal decline in revenue and margins in the fourth quarter, with the transitory issues Dave outlined earlier, weighing on the number a little more than usual. As a result, we believe North America will be down sequentially, although we are not expecting as sharp of a decline as we had in 2012. As we move into 2014, we anticipate North America margins to recover, as customer activity resumes and we see the payoff of our strategic efficiency programs and recent cost optimization efforts.

Now, I’ll turn the call back over to Dave for some closing comments. Dave?

David J. Lesar – Chairman, President, and CEO, Halliburton Company

Thanks, Mark. So just a quick summary. Eastern Hemisphere continues to deliver a top-tier growth, leading the industry year-to-date and we expect a strong fourth quarter with margins in the high teens. Latin America will be flattish, but expect strong growth in 2014. For North America, we anticipate typical seasonality in the fourth quarter with some pricing pressure and lingering effects of the Colorado floods, but margin improvement as we go into 2014. And finally, as demonstrated by our dividend increase earlier this year and the repurchase of 10% of our shares, we are very confident in the strength of our business outlook and are focused on delivering leading shareholder returns.

With that, let’s open it up for questions.

Section II: Q&A Session

 

Operator

(Operator Instructions). Our first quarter comes from James West of Barclays.

James West – Analyst, Barclays Capital

Congratulations on continued strong growth in Eastern Hemisphere, very impressive. Dave, a question for you about the outlook for 2014, specifically on the international side, your peers seem to be coalescing around — you have been expecting growth somewhere in the kind of 10% range with the higher technology content, which of course plays into your strength as well as theirs. Is that similar to your thinking initially?

David J. Lesar – Chairman, President, and CEO, Halliburton Company

Yes, absolutely. I think based on discussions with customer, sort of contract flow that we have got in hand, I would be surprised if it is in a rounded number for next year.

James West – Analyst, Barclays Capital

And then perhaps a little bit of an unrelated follow-up for me. With the Colorado flooding, I know Mark, you had mentioned at a presentation that you thought it was $0.02, $0.03 in the third quarter but that was an initial assessment. Do you have an updated number or some type of sizing of that impact that we could think about?

Jeff Miller – EVP and COO, and Chief Health, Safety and Environment Officer, Halliburton Company

For competitive reasons, we are not going to give you the number just because other than to say that it’s certainly an important part of our business. And I guess I would leave you with, absent that, it would have been an enough to move our completion margins up for North America.

Operator

Our next question comes from Jud Bailey of ISI Group.

Jud Bailey – Analyst, ISI Group

Question on your Latin America market. Two biggest markets, Mexico and Brazil, have some different issues going on. I was wondering if you could help us to think about margins beyond the fourth quarter. What has to happen in Brazil in 2014 and in Mexico, to see a nice recovery in margins? There is a simple increasing activity or there’s some other things you guys can do to facilitate better margin growth for Latin American in 2014?

Jeff Miller – EVP and COO, and Chief Health, Safety and Environment Officer, Halliburton Company

Jeff here. I would say that Brazil is the combination of activity increase would help as well as rightsizing our investment, which we are in the process of doing now. So there are some things that we can do and others that we need the client to do.

With respect to Mexico, I think we really need to see sort of a settling down of all the moving pieces which right now we have got incentivized contract gets started, which certainly helps us, as well as the turnover in the contracting around these mega tenders also brings some stability. So I think those two things do as much as any to improve margins into next year.

Jud Bailey – Analyst, ISI Group

And would it be fair to say that the visibility in both those markets is fairly limited near term? And if you do get some margin improvement, is it going to more backend loaded for the year? Or is there some reason we could see better improvement earlier in the year?

Jeff Miller – EVP and COO, and Chief Health, Safety and Environment Officer, Halliburton Company

Well, I would say, we typically see quite a bit of seasonality in Latin America and so all the moving parts, I don’t think, help in Q1. So I would say we tend to be more back-end weighted.

Mark A. McCollum – EVP and CFO, Chief Financial Officer, Halliburton Company

Our general profitability in Mexico is very strong. So when this activity does kick up and kick back in, we expect a fairly good and solid snapback. As Jeff said that we are getting started in these new contracts in Brazil. We need more activity but even starting those, for there will be a period of time when the Brazil margins may be decremental to our overall Latin America margins. But remember, these are very long-term contracts — eight years and longer and there will be significant up-sell opportunities as those contracts gain traction. And we have the ability to introduce new technologies into that marketplace.

Jud Bailey – Analyst, ISI Group

My second question just relates to U.S. land market. I know your customers are still going through the budgeting process. But maybe you could share with us anything you are hearing from your customers in terms of giving us little more color on your thoughts for 2014 in terms of activity levels and what your customers are telling you for next year?

David J. Lesar – Chairman, President, and CEO, Halliburton Company

For 2014, the outlook is fairly strong. The discussions we are having now sees confidence in the oil window and continuing to invest. So we certainly have a positive outlook for 2014.

Jeff Miller – EVP and COO, and Chief Health, Safety and Environment Officer, Halliburton Company

It may not necessarily reflect itself in rig count, but certainly in the well count and efficiencies. Everybody is very, very focused on continuing to drive efficiencies in the marketplace.

Operator

Our next question comes from Bill Herbert of Simmons & Company.

Bill Herbert – Analyst, Simmons & Company International

Back to North America and the Q4 seasonality. Dave, I think you prophesied a typical seasonality in the Q4 and yet what unfolded in the third quarter was largely atypical with regard to the flooding in Colorado. So wouldn’t that mute the seasonality in the fourth quarter relative to the third?

David J. Lesar – Chairman, President, and CEO, Halliburton Company

Well I guess, if we were up and blowing and going in the Niobrara, it might. But as I said, that’s sort of lingering into Q4. And I think it’s fair to say the visibility on Q4, right now is not as great as we would like it to be, because based on conversations we are having with customers, the holiday work schedule is one of the big unknowns at this point in time with Christmas sort of falling in the middle of the week. Just that where various customers are in terms of spending their budgets for the year and those sorts of things, so I think we are just — as we sit here today, what we see is a typical Q4 unfolding in front of us. And if it changes from that, obviously we will have either a positive or a negative impact from there.

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Bill Herbert – Analyst, Simmons & Company International

And with regard to capital allocation, I know you guys are not done with your planning process. But could you just give us some broad parameters with regard to capital spending for ’14? Then moreover the mechanics of the dividend implementation, 15% to 20% of net income. When does that get announced and what is that predicated on? Is that an internal view as to what you guys will be generating in terms of net income or what?

David J. Lesar – Chairman, President, and CEO, Halliburton Company

Okay. So on the capital side, it is still early in the planning process. But I think that right now, as we look ahead while there are — we are pretty excited about the growth trajectory going into 2014. We are driving hard on efficiencies. So that will probably continue to allow us to be more disciplined around how much capital we are putting into the marketplace. So we don’t sit here today expecting a significant increase in capital overall. There will be some specific projects, maybe some reorientation within the budget. We will continue to rollout our Q-10s and the Frac of the Future into the North American marketplace. And the question is how rapidly do we do that vis-à-vis the overall market trajectory. But right now don’t see significant changes in the capital overall.

The dividend policy, the 15% to 20% of net income – it will always be sort of a moving target. The board has the discretion to set that dividend target. They do so always in looking not just at the net income, but also our cash flow and looking at our relative investment opportunities that fall ahead of us. I guess the answer is stay tuned and we will be talking with the board and then making adjustments as necessary. But our cash flow continues to be very, very positive. Even with all the actions that we took this quarter, we are pleased with the cash flow in the quarter.

Operator

Our next question comes from Waqar Syed of Goldman Sachs.

Waqar Syed – Analyst, Goldman Sachs & Co.

My question relates to international service pricing. What are you seeing there? Either the same trends, are you seeing some better pricing now?

Jeff Miller – EVP and COO, and Chief Health, Safety and Environment Officer, Halliburton Company

As we look out into the Eastern Hemisphere, we have continued to see a steady improvement, but no inflection point if that’s where that question is leading. So there is a lot of visibility on the growth in the Eastern Hemisphere or internationally and to a large degree we are built into that.

David J. Lesar – Chairman, President, and CEO, Halliburton Company

Waqar, this is Dave. I would also add to that. Any tender in a large project still is tending to be very, very competitive.

Waqar Syed – Analyst, Goldman Sachs & Co.

What will it take to change that kind of competitive pressure? What do you think the industry needs to see?

Jeff Miller – EVP and COO, and Chief Health, Safety and Environment Officer, Halliburton Company

It would be a dislocation sort of event where there is inadequate capacity to meet demand. But I would say that as Dave said, the majority of the contracts are fairly large and there is a lot of visibility of those contracts. So I don’t see kind of any surprises in the Eastern Hemisphere that we create that sort of supply demand dislocation.

Waqar Syed – Analyst, Goldman Sachs & Co.

And then vis-à-vis Brazil, you mentioned about rightsizing and you also mentioned you need to get customer approval for that. But when do you think you will know one way or other whether you can right size there or not, what’s the kind of timeline there?

Jeff Miller – EVP and COO, and Chief Health, Safety and Environment Officer, Halliburton Company

Yes. We expect to see some of those answers into Q1, I would expect.

Operator

Our next question comes from Angie Sedita of UBS.

Angie Sedita – Analyst, UBS

So we talked a little about on your last conference call. Can you give us your updated thoughts us on the U.S. pressure pumping markets and maybe we could reach equilibrium in conjunction with that on the Frac of the Future initiative given this competitive environment and the value to rolling out the Frac of the Future program at accelerated pace. And as you are rolling out to this program, are you retiring or relocating equipment?

Jeff Miller – EVP and COO, and Chief Health, Safety and Environment Officer, Halliburton Company

With respect to the Frac of the Future, we are continuing to roll that out and as we rolled it out, we have retired equipment or moved that equipment overseas. So yes we see value in continuing that program and getting the equipment into the market. With respect to attrition sort on the back of current utilization in the North America, as we said there is about a 20%, we believe, oversupply in the market now, though we do see increasing drilling efficiency sort of the rate that is greater than increasing completion efficiency and because of that, we expect to see attrition continue. At what point that is, I expect, certainly out into next year, late next year or beyond, though any spike in gas activity would certainly take that out very quickly.

Angie Sedita – Analyst, UBS

So you are thinking at this time late this year or late 2014 or potentially even early 2015?

Jeff Miller – EVP and COO, and Chief Health, Safety and Environment Officer, Halliburton Company

That’s right.

Angie Sedita – Analyst, UBS

Then as an unrelated follow up. Can you give us an update on your efforts to enter the artificial lift segment? I know you purchased a smaller artificial lift company some time ago. Are there other acquisition opportunities out there or do you think you can grow this business internally? And if you do grow it internally, how long do you think it will take to have critical mass in the segment?

David J. Lesar – Chairman, President, and CEO, Halliburton Company

Angie, this is Dave. Let me handle that one. We have talked over the last couple of calls about the entry into artificial lift, especially ESPs. And I can tell you, it’s a fantastic business. So it’s one of our fastest growing businesses, although it’s not big enough to move the needle for us right now. But because we like it so much, we are going to look at both driving organic growth as well as bolt-on acquisitions.

Operator

Our next question comes from David Anderson of JP Morgan.

David Anderson – Analyst, JP Morgan

On the Europe/Africa/CIS side, I notice that the C&P margins spiked this quarter. I was just wondering, is this from point forward product sales into the third quarter and therefore should we expect those margins to kind of head back into the mid-teens in the fourth quarter?

Jeff Miller – EVP and COO, and Chief Health, Safety and Environment Officer, Halliburton Company

No. This is just on the back of the strengthening business, both completions and stimulation.

David Anderson – Analyst, JP Morgan

And I had one other question that is completely unrelated here, just on your Battle Red and Frac of the Future. I just wondered if you just help us conceptualize how the impact is going to play out here. Can you kind of tell us like what — if you look and say one of your frac fleet, say two years ago versus one of the new fleets today, where is the biggest difference here in terms of the cost and efficiency? You have talked about reducing labor. I am just wondering, is it the size of the frac spread, is it the reduced maintenance spending? Now you have been into this for at least a couple of years now, where do you see the biggest impact here?

David J. Lesar – Chairman, President, and CEO, Halliburton Company

Stay tuned for our analyst day, Dave. That’s where we are going to lay it all out here in a couple of weeks.

Operator

Our next question comes from Jim Wicklund of Credit Suisse.

Jim Wicklund – Analyst, Credit Suisse

Your CapEx is significantly above your DD&A and has been for a while and it’s significantly higher on a ratio basis above your peers. Now you are generating fabulous returns on capital. So I am not claiming but can you explain to us why your CapEx versus your DD&A is so much higher than your peers?

Mark A. McCollum – EVP and CFO, Chief Financial Officer, Halliburton Company

I don’t have enough insight into our peers to understand what they are doing on their capital spending. I know what drives ours. For a long time, we are spending a lot of maintenance cost on old fully depreciated equipment. So when we evaluate what we are doing, we are looking at maintenance cost and depreciation on a combined whole. So, yes, our depreciation is going up as we have new equipment. We have relatively fast depreciation rates relative to useful lives of that equipment in terms of what we can do with it long-term and that’s driving our maintenance cost down on a percentage of revenue basis overall. So it’s a zero sum game.

The other thing that we, of course, had to do over the last several years has made some fairly substantial investments in manufacturing, technology centers and fixed assets, basis of things around the world to position ourselves for the growth in Eastern Hemisphere and Latin America that we are achieving. So it may not look as productive but the fact is that’s the [anti] for being able to be there and to serve those customers in the places around the world. So that’s been a fairly large percentage of our overall CapEx and that will probably continue as we continue to expand and in particularly in the unconventional market around the world over the next several years.

David J. Lesar – Chairman, President, and CEO, Halliburton Company

Let me just give you a little perspective on what’s Mark saying. If you add up the amount that we spent on manufacturing our big new facility in Singapore, our big new technology centers in Houston and in Saudi and Brazil, they are probably pushing a $1 billion just for those. Plus you add up the infrastructure we built out in the U.S. to help our logistics and those are current cash flow, long-term depreciation, but I am telling you long-term payback things for Halliburton. So I think that we have had a spike in the fixed assets side of the business but they will pay off in the long run.

Jim Wicklund – Analyst, Credit Suisse

Okay. So I guess the returns you are generating, I am not complaining, but I was curious. My follow-up if I could, Battle Red. When we hear you have record revenues, but that you are laying people off, people get spooked. They think that’s foreshadowing. Where’s the Battle Red initiative? Where are the layoffs being done, is this only U.S. initiative so far? I realize they are initiatives, but can you kind of tell us where the targeted goal is in terms of people to where it’s occurring, so we can have a greater confidence that this isn’t foreshadowing for some slowdown?

Jeff Miller – EVP and COO, and Chief Health, Safety and Environment Officer, Halliburton Company

Yes. Jim, the bulk of that was in North America. It was geared around our efficiency drive and it was taking out basically as we figured out how to do things more efficiently. We find that there are people that are excess, we are able to effectively do more efficient work in the back office. Also even at the [cold] face, so our ability to relook at how efficiently we go to work. So I would say that’s not foreshadowing. What that is, is really coming to fruition sort of our confidence and the ability to execute the work, either with fewer people or fewer people in the back office.

Operator

Our next question comes from Brad Handler of Jefferies.

Brad Handler – Analyst, Jefferies & Co.

Maybe I will stick with the Western Hemisphere as well please, and start with a question that may feel little bit more open ended than I like, but let’s see how you guys respond to it. I guess I am curious as ’14 is shaping up for you. Whether you see the relative opportunity — it’s looking at things like reduced cluster spacing, higher sand per stage, some of the things you have mentioned. I guess I am curious whether the opportunity seems more bent or more shaped by more customers of yours adopting those kinds of measures more aggressively, or in other words, sort of raising the averages, if you will, across the landscape, or if it is a little bit more sort of rig count and well count-driven.

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Jeff Miller – EVP and COO, and Chief Health, Safety and Environment Officer, Halliburton Company

That is more customer-driven than that is rig count-driven. I think this is though just a view of how to get better frac propagation, what could be the technologies. And so I would say it is a technical view more so than it is sort of the overall averages just moving up.

Brad Handler – Analyst, Jefferies & Co.

In other words, — but more of your customers are applying some of those enhanced recovery, if you will, or enhanced techniques.

David J. Lesar – Chairman, President, and CEO, Halliburton Company

Brad, we have talked about in the past. It’s really service intensity and it’s sort of service intensity beyond just getting more fracs or more wells down per pad. It’s actually now applying some of the new technologies that we have to make better wells, lower cost of BOE and make our customers more money, but also generate additional revenues for us. Then if the rig count kicks up on top of that, that would just the additional plus to the upside.

Brad Handler – Analyst, Jefferies & Co.

An unrelated follow-up. I just would appreciate some more clarity also on Mexico. If your current activity is declining at least onshore, first of all, is the jack-up market at all an offset here even as you hit early in ’14? And then secondly, can you maybe just give us an update on the mega tenders and if there has been any kind of delay in terms of your expectations and in terms of getting those awarded and again trying to place when some of that work might kick in for everybody?

Jeff Miller – EVP and COO, and Chief Health, Safety and Environment Officer, Halliburton Company

Yes. I mean there are offset. That’s a big market in Mexico, so there are offsets and there is offshore work that’s being done, there is deepwater work that’s being done. And for example, the incentivized contract, so there are offsets in that market. But with that said, the mega tenders are important, because it sort of refreshes budgets and resets the table in terms of work well into the future.

As far as the timing of that goes, no, I am not surprised by where that stands. I mean, we knew that that would be a large undertaking and take time for our client to get organized around how to put that out. Again, our view is sort of early Q2 is a realistic sort of startup time for that activity if things proceed as planned.

Operator

Our next question comes from Doug Becker of Bank of America Merrill Lynch.

Doug Becker – Analyst, Bank of America/Merrill Lynch

Jeff, you mentioned the completion efficiencies are increasing in a slower rate than the drilling efficiencies. Just hoping to get some order of magnitude here and what technologies should we be keeping an eye on that could flip this? In other words, what technologies might make completion efficiencies outpace drilling efficiencies going forward in just perpetuating the oversupply in frac?

Jeff Miller – EVP and COO, and Chief Health, Safety and Environment Officer, Halliburton Company

Yes, as we look at that, if we think that the drilling efficiency is up in the 20% range and we look at completion efficiency somewhat less than that, we will see it probably about a 7%, 8% sort of efficiency in drilling that’s outpacing the efficiency in completions. I think one of the things that tempers completion efficiency is going to be the size of jobs and the amount of activity requires completion actually get in some cases bigger rather than smaller. And this is where the frac propagation happens. So again, my outlook is that we continue to attrite equipment over time as opposed to the other.

Doug Becker – Analyst, Bank of America/Merrill Lynch

Okay, and then Mark, you mentioned that North American margins would be down in the fourth quarter but not as bad as last year. Does this mean, for margins, we should be assuming kind of a normal seasonal decline 50, 100 basis points, just on our numbers?

Mark A. McCollum – EVP and CFO, Chief Financial Officer, Halliburton Company

Yes, that’s exactly what you should expect.

Operator

Our next question comes from Kurt Hallead of RBC Capital Markets.

Kurt Hallead – Analyst, RBC Capital Markets

Just curious you guys have addressed the excess capacity situation. We continue to do this; it seems, on a quarter-by-quarter basis. Just want to get an update from you as to — your latest thought as to when you think these supply demand curves may balance? Any guesses on that in 2014?

Jeff Miller – EVP and COO, and Chief Health, Safety and Environment Officer, Halliburton Company

Yes, this is Jeff. I would say, it is late 2014 or early ’15 by the time when we start to see that tightening, though as I’ve just described, I do think that we are down the path that consumes more equipment rather than adding more equipment.

Kurt Hallead – Analyst, RBC Capital Markets

And then you guys referenced some of your contract renewal and repricing and so on. In general what kind of magnitude of pricing pressures are you seeing at this point vis-à-vis your prior contracts?

Mark A. McCollum – EVP and CFO, Chief Financial Officer, Halliburton Company

For competitive reasons, that’s something we just can’t give.

Operator

Our next question comes from Jim Crandell of Cowen.

Jim Crandell – Analyst, Cowen Securities

You said in, I think, your press release that you had lower profits from Iraq and then you stated on your call about the Majnoon contract ending. I thought you had written that down to breakeven anyway? Could you reconcile that for me?

Mark A. McCollum – EVP and CFO, Chief Financial Officer, Halliburton Company

Now, Jim, what happened in the second quarter, as we really made a hard push to get that contract done at the end of the second quarter. It’s built over a little bit but the reality of that push and kind of increased our profitability on that contract as we took it across the finish line. Now it’s over and while there is a little bit of work left, sort of a very small phase two, we finished that first phase of those big contracts, the initial awarded contracts. So it hasn’t impacted reducing the overall profitability in Iraq overall. But that isn’t to say that we are losing money there. Just the opposite. In fact, as we go forward on our new contracts, we are trying to be very, very disciplined about the work that we take on and making sure that it continues to improve our profitability in that region going forward. It is magnitude as always and not the margins.

Jim Crandell – Analyst, Cowen Securities

Mark, how do you see the overall levels of activity trending for Halliburton in Iraq going forward?

Jeff Miller – EVP and COO, and Chief Health, Safety and Environment Officer, Halliburton Company

Yes. I’ve got a positive outlook on our activity as we go into 2014. So what I would say is, we are much more disciplined around the contracts that we pursue and the terms under which we will accept them. So it’s returns and margins first as opposed to top line growth and we have been, as I said very disciplined about that. And so I am confident that we will grow that business, but again grow business that we can all be happy with.

Jim Crandell – Analyst, Cowen Securities

Okay. Just one quick follow-up. Did you say that the price deterioration that you are seeing in the U.S. and that you expect in the U.S. is frac-only? And are there any other product lines in the quarter which experienced price deterioration in the U.S.?

Jeff Miller – EVP and COO, and Chief Health, Safety and Environment Officer, Halliburton Company

Jim, this is Jeff. No. I would say that the pricing pressure we see is more widespread than just fracturing.

Operator

Our next question comes from Jeff Tillery of Tudor, Pickering, Holt.

Jeff Tillery – Analyst, Tudor Pickering

With Q4 a heavier time of the year for contract rollovers in the frac market and spot crews for the industry generally is just not making any money. I think it’s obviously contracts will be a bit more competitive. Can you just talk about how your strategy as you go into these rollovers, how you think to differentiate yourselves?

Jeff Miller – EVP and COO, and Chief Health, Safety and Environment Officer, Halliburton Company

From a differentiation standpoint, Jeff, we absolutely believe that in our ability to deliver efficiency. We’ve got technology like I have run through them but PermStim, but a whole range of chemistry technologies and others that absolutely differentiate Halliburton in the market. So as we look at contracts in any sort of environment those are the things that we turn to and that our clients count on Halliburton to do.

David J. Lesar – Chairman, President, and CEO, Halliburton Company

The competition varies basin to basin and so depending on the amount of capacity that’s there, the complexity of the reservoir, we can make a different value proposition with customers on differentiation. In some cases, where they have gone off and the customer has experienced what someone else has done we have been able to take that fork back at a little bit higher price.

Jeff Tillery – Analyst, Tudor Pickering

It’s been focused — my understanding — mostly North America with the successes you are having there. Any reason to think you won’t continue this push globally?

Jeff Miller – EVP and COO, and Chief Health, Safety and Environment Officer, Halliburton Company

No.

David J. Lesar – Chairman, President, and CEO, Halliburton Company

No. We expect that as we go into ’14 and beyond, we will be staging the rollout once we kind of get all the kings out in the North America, the rest of the world is ready to go. And so we will be rolling those out over time although probably at a slightly slower space than we used for the North America rollout just given its size and complexity.

Operator

Our final question comes from Scott Gruber of Sanford Bernstein.

Scott Gruber – Analyst, Sanford C. Bernstein

Back on the domestic frac market, pricing continues to decline, but it appears that the operating margin for the industry is actually up. Is it fair to say that the primary driver of the pricing weakness today is a willingness by the pumpers to actually lower rates to improve asset turns via these 24-hour services? My question is actually would we still be seeing pricing declines if there wasn’t a trend toward more 24-hour work?

David J. Lesar – Chairman, President, and CEO, Halliburton Company

The question was would we see a decline without the 24-hour work? It’s an interesting question. Scott, I don’t know for sure whether we would know that or not, because obviously you can’t ever exactly know what motivates our competitors to sort of come in with the pricing that they do. But I do think that often times what we are seeing is guys really wanting to get equipment to work and willing to take a lower price if that’s necessary to do that. The question always is, okay, but are they really creating the value for the customer? In our sort of overall value proposition, we are always focused on. It’s not just the cost per stage to the customer, but what are they achieving on an increased production, driving down the overall cost on a per BOE basis. And , when customers get focused on that, I think that the results begin to change in our favor.

Scott Gruber – Analyst, Sanford C. Bernstein

Well, are you still seeing declines in pricing for single spot wells? Can you identify contracts, new incremental 24-hour work where the pricing pressure is a lot more severe as pumpers compete for that work? The asset turned improvement is huge.

Jeff Miller – EVP and COO, and Chief Health, Safety and Environment Officer, Halliburton Company

Well I guess what I will say is we don’t typically — I mean we don’t pursue that one-off market that you just described. And so I would, just from a competitive standpoint, I wouldn’t walk through our contracts and our pricing on those different contracts. So suffice to say, that we tend to work in a more contracted fashion over a longer period of time.

Operator

Thank you. And at this time I turn the call back to management for any closing comments.

David J. Lesar – Chairman, President, and CEO, Halliburton Company

Yes, before closing the call, I just want to remind everybody that on November 6, we will be having our analyst day and it will be webcast. You will be able to access the webcast link from the Investor Relations page on halliburton.com. And with that Sam, I will turn it back over to you for the close-up call.

Operator

Thank you, sir. Ladies and gentlemen, thank you for participating in today’s conference. This does conclude today’s program. You may all disconnect. Everyone have a wonderful day.

 

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